Tech startups prospect for oil and gas business

By Rhiannon MeyersHouston Chronicle

Published 7:12 am, Tuesday, May 26, 2015

When Oliver Diaz needed instructions on how to jump-start his car, he didn’t run to the glove box to dig out his user manual. Instead, he whipped out his cellphone and used software designed by his company to scan the “Jeep” logo and search online for maintenance documents.

He then pointed the phone under the hood, selected “jump-start” from a list of procedures, and up popped a constellation of icons, giving Diaz step-by-step directions overlaid on the smartphone’s image of the Jeep’s engine.

That procedure took Diaz’s business partner 30 minutes to develop using four pages from a Jeep user manual, Diaz told an audience gathered in Houston on Tuesday to discuss the latest innovations in the energy industry.

His goal is to sell the application to the oil and gas industry, which has been slow to replace the reams of paper crammed into inches-thick binders describing in precise detail how to move a land rig or drill a well.

For Diaz and other tech entrepreneurs hoping to pick up oil and gas customers, the crude price slump that began last summer provides a chance to pitch ideas to companies seeking ways to pull more oil and natural gas from the ground for less money.

The oil companies’ appetite for new ideas positions the city’s entrepreneurs for a boom of their own, said Scott Nyquist, director of sustainability and resource productivity at McKinsey & Co., a global consultancy firm.

“What’s really happened is a mind-set shift,” he said to a group of 450 entrepreneurs, investors and energy executives at an event hosted by Surge Ventures, which provides funding and guidance for energy startups.

Long before oil prices collapsed, the industry had financial problems, Nyquist said. In 2005, oil and gas companies generated a 14 percent return on their capital. By 2014, that had fallen to 5 percent, and many companies were going into debt to pay shareholder dividends.

“Really, for the past 15 years the industry has been focused on growth and wasn’t really focused too much on improving productivity,” he said. “And now the industry is very focused on getting returns and very focused on anything that will help them improve productivity.”

That means entrepreneurs brimming with ideas on ways to improve the industry have a rapt audience, Nyquist said — a dramatic reversal for oil and gas companies that historically have clung to old models, reluctant to upend processes or systems that have worked for years.

The oil industry on average takes about 30 years to develop an idea into a commercial product; that’s more than three times as long as it takes to develop the average consumer product, he said.

“It’s not a pretty picture for our industry,” he said.

The crude slump has forced companies to get creative, giving them a higher tolerance for risk as they snap up new technologies aimed at reducing inefficiencies and slashing costs, said Kirk Coburn, founder and managing director of Surge Ventures, in an interview.

These same companies weren’t as willing to try new things when oil was $100 a barrel because they were singularly focused on keeping operations running to make as much money as possible, he said.

“Now it’s every time I produce a barrel, how much money am I making per barrel?” he said. “When you’re squeezed on margins, it makes a bigger difference.”

With the oil industry now more willing to consider new ideas, Houston’s tech companies are in the best position to capitalize on the change of attitude, he said. That’s because some of the bigger, better financed Silicon Valley companies that scrambled to gain a foothold in the oil and gas industry during the booming heydays have been scared away by the collapse in oil prices.

Some Silicon Valley companies also failed to make inroads in oil and gas ventures, Coburn said.

“They are brilliant people — but they don’t understand the industry well enough,” he said. “They can’t understand the sales cycle. And the people here are like, ‘I don’t trust you. Are you going to be around when I need you?’”

Opportunities may be ripe for Houston’s entrepreneurs, but the city still lacks a large investor base willing to throw cash behind these startups in their infancy, Coburn said.

Speaking from the stage at the House of Blues on Tuesday, Diaz said his company, Gnosys, has completed the beta tests of its online owner’s manual and will be trying out the system with at least one energy company, Houston-based oil field equipment maker FMC Technologies.

But the company needs cash, Diaz said, wrapping up his presentation with a pitch asking for a partner and more companies to test its technology.

“We know this market, we know this technology and we definitely know the clients, but we could use some help with the financing,” he said.